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What does Japan’s history tell us about the DJIA’s future?

By Murray Bourne, 06 Sep 2010

The Dow Jones Industrial Average (DJIA) is an index comprising the largest 30 companies on the New York Stock Exchange.

It's an important indicator of how "the market" regards the future of those companies, and by extension, the future of the broader market.

Japan had a booming economy right up to the end of the 1980s (when I lived there). It's stock and financial markets grew exponentially and were at lofty heights but have spiralled down ever since. Now, of course, China has overtaken Japan as the second largest economy in the world.

Japan has a massive debt burden from all its unsuccessful pump-priming of the economy.

Meanwhile, the US economy had steady growth until the boom of the late 1990s (which crashed). It fell because of September 11 and the Iraq invasion. And it crashed again as the Global Financial Crisis took hold in late 2008.

Comparison of Japan's Nikkei and DJIA

In the following chart, I have compared Japan's Nikkei 225 (from 1979 to Sep 2010, in blue) with the DJIA from 1970 to Sep 2010 (in dark red).

We can see the growth pattern was very similar, as was the plunge after the boom.

DJIA / Nikkei 225 comparison to Sep 2010

So will the DJIA follow the Nikkei down?

Time will tell, but with the huge debt burden of the US, and its expensive military reach around the world, it could well follow Japan's lead.

The growth in the 2 markets (up to their peaks) are examples of exponential growth, while Japan's rout is looking like exponential decay.

For more on this, see Dow Jones Industiral Average Model.

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